This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogeno...

This paper analyses the distribution of seigniorage in an enlarged European Monetary Union (EMU) when the new EU member countries from Central and Eastern Europe adopt the euro. In principle each country of a monetary union contributes to seigniorage in proportion to the country’s demand for base money. However, the actual distribution of seigniorage by the European Central Bank is made in acco...

To quantify the implications of common currencies for trade and income, we use data for over 200 countries and dependencies. In our two-stage approach, estimates at the first stage suggest that belonging to a currency union/board triples trade with other currency union members. Moreover, there is no evidence of trade-diversion. Our estimates at the second stage suggest that every one percent in...

In Kohler (2002) we analyse coalition formation in monetary policy coordination games between n countries. We find that positive spillovers of the coalition formation process and the resulting free-rider problem limit the stable coalition size: since the coalition members are bound by the union’s discipline, an outsider can successfully export inflation without fearing that the insiders will tr...

The Interactions between Debt and Currency Crises – Common Causes or Contagion? In contrast to the well-known twin currency and banking crises the literature has so far neglected a second type of twin crises, the simultaneous occurrence of currency and debt crises. The decision of a government to devalue and/or to default is closely interlinked through the government’s intertemporal budget cons...

This paper presents a simple modification to the standard IS curve used, at least implicitly, by policymakers that allows capital flight to have a contractionary effect in emerging market economies. In the standard model, capital flight leads to an expansionary shift in the IS curve through an increase in net exports. However, in the presence of liability dollarization for domestic firms, a cur...

This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth ...

This study investigates the profit efficiency (PROFEFF) of small banks (those under $500 million in total assets) for 1990–96. Assuming that small banks and large banks use the same production technology, we find, consistent with Berger and Mester [J. Bank. Finance 21 (1997) 875], that small banks are more profit efficient than large banks. Small banks in non-metropolitan statistical areas (non...

In this paper we modify the method of Blanchard and Quah (1989) in order to estimate a structural VAR model appropriate for a small open economy. In this way we identify shocks to output and prices in the members of the two monetary unions that make up the African CFA Franc Zone. The costs of monetary union membership will depend on the extent to which price and output shocks are correlated acr...

We assess the behavior of real effective exchange rates (REERs) of members of the CEMAC zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments are derived for the period 1980 to 2009. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected...